Summary of the Program at the Cincinnati NIRI Chapter Meeting on January 12, 2011
Making Sense of Mad Markets
The Cincinnati Tri-State Chapter of NIRI held its fourth meeting of the season on January 12, 2011. Tim Quast, founder and managing director of ModernIR, delivered an interesting presentation regarding changes in the stock market that has transformed investors into traders, and how Investor Relations professionals can better understand how trading works. That understanding can influence certain IR activities such as timing of news releases or marketing to investors, while also providing useful insight the next time the CFO asks, "What happened to our stock?"
Tim challenged the conventional wisdom that stock prices correlate to business value by noting that often the price of a particular stock moves with the market. He explained that in the past buyers and sellers were the main influencers of stock prices, while more recently, particularly in the last decade, an explosion of regulatory rules has transformed the role of intermediaries so that speculators play a large role in stock price changes. Speculation comes from rebate traders, arbitragers, exchange trade facilities, dark pools, etc., often resulting in frantic, massive high-frequency trading. A crucial point in Tim’s explanation is that trading today is almost entirely incentivized. Small price movements become profitable, and can be more of a price influencer than fundamentals of a stock.
Regarding what this means to IR professionals, Tim noted that stock "churn" from electronic market making, high-frequency trading can outweigh rational volume of stock transactions from thoughtful investors. Gathering data and studying trends help distinguish between rational, speculative and program trading. Companies may want to alter timing of news releases or traveling to meet investors, or target particular prospective investors, based in part on this trading information. Tim concluded that knowledge is power and knowing how markets work should be important to those managing IR functions. It also can help manage expectations of company management.